Pressure is building on all lenders to improve the fairness of their contracts to SMEs, after ASIC announced it had secured changes from specialist lender Prospa on its loan agreements.
Corporate watchdog ASIC announced it approached Prospa with concerns that a number of its provisions breached the unfair contract terms (UCT) rules and warranted being changed.
These included, among others:
- Requiring consent to repay the loan early
- Unilateral variation provisions
- A “cross-default” clause that allowed Prospa to call a default under any finance document related to the loan, such as a guarantee or security document
- Certain restrictions on the borrower’s indemnity
- A clause that absolved Prospa from being responsible for its conduct or representations it made to borrowers about the loan agreement
- Impositions on a loan guarantors
In addition to new loans being written using the new terms, Prospa has undertaken to backdate these terms agreed with ASIC to all borrowers who entered into new agreements or renewed existing ones since 12 November 2016, when the UCT rules took effect.
Prospa COO Ben Lamb trumpeted the move to amend its contracts as a win for SMEs, claiming it was the “first non-bank lender to complete its review”.
“We believe these changes are industry-leading,” said Mr Lamb.
“We specialise in lending to small businesses and we know any changes we can make to ensure access to finance is simple and easy to understand are going to help our customers save precious time so they can focus on growing their businesses.”
But Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), was less impressed. She said that while the move was better late than never, she was “disappointed it has taken as long as it has”.
“ASIC found a significant number of clauses in the fintech’s contract that required changes,” Ms Carnell said.
“The UCT legislation came into effect in November 2016. Small business standard loan contracts can no longer contain terms that cause significant imbalance in rights and obligations, or cause detriment to the small business.”
She added: “The message here is very simple – don’t use unfair contract terms. ASIC has made it clear that it will consider regulatory action. We urge all lenders to small businesses to remove clauses outlined in the ASIC Report 565 from their standard form loan contracts.”
Prospa had suggested that some of the terms being replaced had historically not been relied upon – an issue which ACCC deputy chair Mick Keogh recently raised with My Business.
“In discussions with businesses where we’ve told them that we believe their contract or some terms of their contract are unfair, they often say ‘we would never rely on that anyway, it was just put there by the lawyers’,” Mr Keogh said.
“That raises the question of why they go to the level of complexity that they seem to want to go to in relation to the terms and conditions of some of these contracts anyway.”
Unfair terms and clauses is an ongoing issue, particularly among loan and bank agreements.
In May, it was revealed at the banking royal commission hearings into small business lending that Suncorp was still using terms deemed unfair by regulators.
Around this time last year, ASIC revealed it had reached a consensus with all four of the major banks to remove unfair terms from their contracts, setting a precedent for the wider finance industry.
The ACCC has revealed it is pushing for a major overhaul of the UCT rules to provide more impetus on larger businesses to comply and the introduction of stiff penalties for those failing to do so.
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